Loyalty Litigation

The U.S. is a litigious nation. Each year, more than 15 million lawsuits are filed across the country with a new lawsuit lodged every two seconds. So it’s not surprising that some of these lawsuits involve frequent flyer program members who are bitter about unfavorable changes made by a loyalty program.

Frequent flyers take loyalty program benefits very seriously and they are not happy when they believe that they are being treated unfairly and when they feel a program has broken a promise made to them. True to the American way, they sue when they are not happy.

In this report, we’ll take a look at three of the more recent cases involving frequent flyers and frequent travel programs.

Banakus v. United MileagePlus

Daniel Banakus from California has filed a suit claiming that United breached contracts with United MileagePlus members when it combined the frequent flyer programs of United and Continental in March 2012 and changed some of the rules of United MileagePlus in the process, specifically for Premier members of the program.

The lawsuit was filed as a class action complaint for Premier members of United MileagePlus. The actual numbers of those in the class action are not known by us or by the attorney bringing the lawsuit, Joseph J. Siprut, because United has not shared that number with him yet. But in a phone conversation we had with him he said, “… basically, it is all the people who are in the Premier level of membership in the frequent flyer program who flew in the preceding calendar year from when the benefits were changed.”

The suit reads, in part:
“For years, United has boasted of the ‘tremendous travel and mileage earning possibilities and benefits’ provided by its frequent flyer program. Indeed, United’s website proclaims that its frequent flyer program provides ‘the best combination of services and rewards for frequent travelers.’ Chief among these awards were the exclusive benefits that United promised to its ‘Premier Members’.”

The text of the lawsuit continues to point out that members of United MileagePlus must earn at least 25,000 miles “on United flights–roughly the circumference of the Earth” in a calendar year to earn Premier status, which is the lowest level elite status a member in United MileagePlus can earn.

And, “On March 3, 2012, United launches a new frequent flyer program that drastically reduced and devalued the benefits for its Premier Members. Importantly, however, United has refused to honor the benefits that Premier Members had already earned in the preceding calendar year–thus breaching its contracts with those members.”

Specifically, the suit reads that Premier members were promised certain exclusive rewards the following year when earning 25,000 elite-qualifying miles, including free seating upgrades and two free checked bags on each flight.

And, “Unlike other frequent flyer programs, consumers could not obtain these qualifying miles through credit card purchases, or by traveling on a ‘partner’ airline. Rather consumers could do so only by purchasing 25,000 miles worth of airfare in a calendar year.”

The suit states that a consumer has to spend over $6,800 just to acquire 25,000 qualifying miles–“no small or inexpensive feat.” The $6,800 amount was found taking into consideration that an average coach fare is $300. The suit further contends that the Premier benefits were not “merely gratuities that United could change or modify at any time based on its whims” but rather a unilateral contract. “Thus, while United may have reserved the right to change the terms of its Premier program going forward, that did not give United the right to withhold contractual benefits that had already been earned.”

Under the new MileagePlus program, Premier Silver members no longer receive access to Economy Plus seating–rows set aside in the front of the coach section with additional legroom–when making reservations, but will only have the chance to sit in the Economy Plus section if there is room available when checking in for your flight, “a task that is all but impossible,” according to the suit. To back up their claim, they quote InsideFlyer magazine’s November 2011 cover story, “The New United MileagePlus Takes Off”:

“For many members, Economy Plus is seen as a huge plus for the MileagePlus program. Because entry-level elites are the last in line for upgrades, they rarely get upgraded, and often end up in coach. Unlike other airlines without an intermediate section between coach and business class, United has an Economy Plus section and low-level elites could rely, at the least, on up to five extra inches of legroom …”

Another change is that Premier Silver members can now only check in one bag for free instead of two.

The suit contends that “when the Plaintiff and other members of the Class flew the requisite 25,000 miles to become Premier Members, they accepted United’s offer, and formed a contract.” The Plaintiff is demanding a trial by jury and requests that the court decrees that United breached a contract and that the Plaintiff and each of the members of the Class be awarded damages for United’s breach of contract and recover their costs of suit, including reasonable attorney’s fees and expenses as provided by law among other requests.

The suit is still in the early stages so no resolution has been made. United has filed a motion to dismiss the case and the court will now need to issue a ruling on United’s motion. Siprut said, “We expect and hope that we will prevail and overcome the motion to dismiss at which point the case will move forward.” The process to get the case to the point of a trial will take at least a year but Siprut says that, “If we overcome their motion to dismiss, I think it will put incredible pressure on United and we’re optimistic that the case will settle early and successfully for the class–that’s our goal.”

“I think the natural way to handle it would be to restore the benefits they were supposed to get. It really is that simple.” He continued, “We think they ought to honor the bargain and make good on their word.”

Siprut’s firm focuses on consumer protection laws and class action suits. He said, “… for better or worse, the airlines just seem to be short-sighted about the way that they treat customers and that can lead to litigation.”

Siprut has experience going against airlines. He is also the attorney for Adam J. Levitt, who sued Southwest Airlines in November 2011 when that airline put an end-date on their free drink coupons and he was left holding about 45 of them. Now a class action suit, it is nearing a final verdict and Siprut is hopeful for a good outcome for his clients.

Regarding the Southwest suit, Siprut commented that the case is still pending, but his firm overcame Southwest’s motion to dismiss, and, “We’re very confident about the case and we’re trying to get 100 percent relief for all the people who possess those drink tickets.”

“The drink coupons are only worth $5 per coupon. If you have one, two or three coupons, you’re not going to bring a lawsuit over $15 … but if you’re representing a class of people across the country each of whom has three or four or five coupons, now all of a sudden you’re talking about millions of coupons, so it goes from a case not worth bringing to an incredibly large case, and that is exactly also the case with United and Banakus.”

We say, know when to hold and when to fold. Whether it’s poker or legal action, the rules remain the same. In this case, we’ve got to go with United MileagePlus. Granted, no one likes a downgrade to any program benefits. But what the attorney has failed to do, even when being directly interviewed about this case, is to acknowledge that MileagePlus has legal language that permits them to change program rules and benefits “without notice” and while we’re not a fan of some of these changes for this level of membership, one could argue that there was a balance of additional benefits that came with the merger that mitigate these two specific items singled out in the suit. And it’s an industry standard that members are earning the 25,000 miles to reach the elite status to get whatever benefits are offered in the following year. And you are enjoying last year’s benefits at the time you are earning for the following year. Also, we might point out to the attorney that paid flight miles are the industry standard to earn elite status. Case dismissed.

Hirsch v. Citibank

A class action lawsuit was filed Feb. 4, 2012 against Citibank alleging that the bank enticed consumers to open a checking or savings account by offering 40,000 American Airlines AAdvantage miles without informing them that the miles would be reported to the IRS as taxable income.

The lead Plaintiffs in the case, Bertram Hirsh and Igor Romanov, also claim that Citibank grossly overvalued the miles at a value of 2.5 cents per mile. The complaint states, “It is widely understood in the marketplace that airline miles are not reported to the IRS as being taxable for income tax purposes. Indeed, Citibank expressly informed plaintiff Hirsch that the American Airlines miles that he would receive for opening up Citibank checking and savings accounts were not taxable.”

“Even if the airline miles were taxable, Citibank’s practice of valuing the airline miles at 2.5 cents per mile is grossly unfair and deceptive. Airline miles have no value to Citibank customers that can be fixed at the time they are awarded. If redeemed, these miles typically have an average value to customers of between .76 cents per mile and 1.2 cents per mile. At least one study recently concluded that American Airlines miles in particular are only worth
about .76 cents per mile.”

Citibank did not send IRS 1099 forms to those who received bonus miles through applying for a credit card. The difference being the miles offered when opening a checking or savings account were viewed as a prize and the instructions to Form 1099-MISC call for reporting of “prizes and awards” as income, while miles given as a sign-on bonus for a credit card are viewed as a rebate, which is not taxable income according to the IRS because a rebate is seen as a reduction in the purchase price.

Citibank might also have chosen to issue the 1099 forms because the IRS has increased the penalties for non-filers of Forms 1099 to as much as $100 per form, up to $1.5 million per calendar year for inadvertent omissions, and for intentional disregard the penalty is $250 per form with no cap on the penalty–potentially a lot of money for a company the size of Citibank. And the IRS has stated that it plans to increase its scrutiny in this area.

Hirsch and Romanov say they each received 40,000 frequent flyer miles for opening Citibank accounts with minimum deposits of $25,000, in New York and California and are now on the hook for $1,000 in income from those miles.

“Citibank does not disclose in its American Airlines promotional offering materials that Citibank will report to the IRS that its customers received miscellaneous income as the result of the receipt of airline miles, or that the American Airlines miles would be valued at 2.5 cents per mile by Citibank, because Citibank knew that very few customers, if any, would take advantage of the offer if the disclosures were made.”

Hirsch and Romanov seek class certification, restitution and compensatory and punitive damages for unfair trade practices, breach of contract, negligent misrepresentation and unjust enrichment. And they request that Citibank be directed to stop the practice. They are being represented by the Law Office of James C. Kelly, a New York City-based firm specializing in consumer protection.

If you were one of those who received a 1099 because of your Citibank AAdvantage miles incentive, Kay Bell, of the “Don’t Mess with Taxes” website suggests that even though there will not be a resolution on this case soon, you should still report the income on your taxes. “If you don’t include it in your income, the IRS will.” Bell concluded, “So pay the taxes now and hope that a future court ruling will let you file an amended return.”

Along with the class action lawsuit, Sen. Brown, Chairman of the Senate Banking Subcommittee on Financial Institutions and Consumer Protection, wrote Citibank stating in part, “During these challenging economic times, middle-class families are pinching pennies to help pay for the cost of a flight to fly home from college, visit an ailing relative or see friends. To some, signing up for a bank account in exchange for frequent flyer miles to help make a trip more affordable is an offer that is too good to resist. However, your actions are leaving working families with the seemingly incorrect impression that when they rack up miles, they are hiking up their taxes, too.”

He continued, “Reporting frequent flyer miles as taxable income is inconvenient to consumers, raises their anxiety unnecessarily and is not required by law. I urge Citibank to halt this practice. The last thing Citibank should be doing is creating baseless fear in middle class families, or placing a nonexistent tax burden on the backs of families who are already struggling to make ends meet.”

So far, Congress has not weighed in on the issue to help relieve frequent flyers from this tax burden.

When we reached Mr. Kelly, the attorney for the Plaintiffs, for comment he said the lawsuit is still in an early stage. “Citibank moved to compel the Plaintiffs to go to arbitration instead of pursuing their claims in court, claiming that Plaintiffs agreed to arbitrate all claims when they signed up for their accounts, and that they also agreed that they would not file a class action.”

He said, “Plaintiffs have opposed the motion because they did not receive any of these agreements.” Citibank says that there is a Client Manual that includes a class action waiver and that it is Citibank’s practice to provide a copy of the Client Manual to new customers at the time they open up a deposit account. Both Plaintiffs knew of no such Client Manual, and, “Where there are no ‘meeting of the minds’, an arbitration agreement cannot be enforced.” Both Plaintiffs also state that had they known they would be receiving 1099s for receiving the American AAdvantage miles, they would not have signed up for the Citibank accounts. Mr. Hirsch even went so far as to question his local Citibank branch after reading in the fine print, “Customer is responsible for taxes, if any,” and wanted to be reassured that the miles would not be taxed because he is a semi-retired lawyer and needs to be careful about his earned income because he could lose a portion of his social security retirement benefits if the threshold is exceeded. He was told that the miles would not be taxed so was doubly surprised to find the 1099 in his mailbox.

Kelly expects a decision from the judge soon about the suit being able to move to the courts instead of being forced into arbitration.

Prediction

This is a case that should not even exist. It is clear from practice that the average member of a loyalty program is not an educated participant when it comes to any program splitting miles between a promotional or rebate offer. We can easily see this one settled and forgotten about very quickly. Citibank should have seen this one coming and settled early on with proactive action.

AAdvantageGeek, a blogger found on BoardingArea.com, posted this prediction about this case:
“I’m not a Court TV analyst, nor is my name on a short list to fill the next vacancy on the U.S. Supreme Court, but I do have AAdvantage Elite status so I think I’m qualified to make a few predictions about the legal outcome of this case. Citibank will settle the case by offering to pay Plaintiffs’ attorneys a large sum of money, a portion of which will probably go to the two lead Plaintiffs; and anyone that decides to join the case as a plaintiff, will get a few extra miles worth less than $25.”

Another prediction comes from Harry Gross who writes about personal finance for the Daily News as mentioned in Philly.com:
“I think Citibank is off-base here, and I suspect we’ll see a favorable ruling from the IRS before the case is heard in court.”

A lawsuit just starting to make progress toward a resolution for frequent flyers involves bonus miles promotions that appeared in June 2011. There are currently 26 Plaintiffs listed in the complaint that was filed last month, although the attorney for the Plaintiffs, Brian A. Rishwain of Los Angeles, says that a class action suit is not out of the question, “We don’t have evidence that this occurred on some systematic basis other than with respect to these certain individuals,” but he says, “I’m not saying that it couldn’t turn into [a class action] to the extent that that’s what the discovery or evidence proves…”

One bonus promotion offered US Airways Dividend Miles members 4,757 miles for making one purchase with web hosting company EasyCGI through the Dividend Miles online shopping mall. The terms and conditions explicitly stated that there were no restrictions on the type of purchase made or the number of purchases eligible for the bonus with terms such as, “There are no restrictions at this time” listed under “Restrictions” and the Frequently Asked Questions stated, “Q. Is there a limit to the amount of miles I can earn? A. NO, you can earn as many miles as you like. There is no cap.”

A similar bonus promotion offered bonus miles for Hawaiian Airlines HawaiianMiles members. But as members jumped at the offer and made purchases, many noticed that their orders had been cancelled without notice and realized that they would not be getting the miles they were promised. The complaint sums it up like this, “Within a week after said purchases had been made, however, Defendants wrongfully and without good cause rejected all of Plaintiffs’ purchases, as well as all of the bonus miles that were supposed to be awarded in connection therewith.”

From what members could ascertain, the companies making the offer simply decided to no longer offer the miles and even went so far as to not honor the purchases already made and cleared through credit cards.

In the October 2011 InsideFlyer cover story, we went into detail about the way in which the companies involved in the offer chose to respond to the mishap. None of the companies involved, US Airways, Hawaiian Airlines, EasyCGI or FreeCause (what EasyCGI called an “independent third party” and is the company that operates the mileage malls for the two airlines), were willing to take responsibility for the mileage fiasco. In an email to an unhappy Dividend Miles member, EasyCGI explained, “Please note that this FreeCause offer was not made by EasyCGI. Nor was such offer authorized, approved of or participated in by EasyCGI. Please understand EasyCGI is not responsible for the actions or inactions of FreeCause.” FreeCause also responded that they were not responsible.

So what’s a frequent flyer to do? The members involved were not only unhappy because they were promised miles for a purchase and then didn’t get the miles, but also because of the way the promotion was handled–no explanation when the orders were cancelled, no apology for the lost miles and no one was even willing to take responsibility.

The lawsuit’s objective is to obtain the miles the Plaintiffs were seeking. As Rishwain said, “It’s just that simple.”

The Plaintiffs will have to wait to see if the suit will result in a trial by jury, which could be years away, or if a resolution by settlement precludes a trial.

Prediction

Of the three we’re writing about, this case clearly falls into the category requiring some legal action. The requirements for earning the miles were clearly posted and members of US Airways Dividend Miles and Hawaiian Airlines HawaiianMiles had everything they needed to make their purchasing decisions–except the knowledge that not a single entity in the role of responsibility would deliver the bonus miles–and then would try to summarily dismiss the members’ purchase activity. It’s inconceivable that of the companies involved in this (US Airways, Hawaiian Airlines, EasyCGI and FreeCause), not a single one of them seems to think they are responsible and have continued throughout the process to point their fingers elsewhere. It’s very rare in frequent flyer programs that the butler did it, but in this case it appears he did. This might be a rare case where damages are inline with the actions of the Plaintiffs. But what do we know?

It’s very early on in the process but the attorney for the Plaintiffs says they have a strong case.

To Sue or Not to Sue?

As a frequent flyer, is it worthwhile to sue when your program makes a change that you’re not happy with? The short answer is, no, not if you’re a single flyer who has lost out because of a change by an airline. If the change by an airline effects a number of people, you can probably find an attorney willing to take the case.

As Siprut said, “I get phone calls from people all the time who have been screwed by airlines. And it’s not uncommon for airlines to make policy changes that breach their promises to their customers. And when that kind of thing happens in a mass basis, that has the makings of a class action.”

The airlines have been served notice that members take their frequent travel program membership benefits very seriously and if the program wants to make a change, they should think carefully about how to propose and follow through with that change.

And if they make a promise of miles through a bonus with written terms and conditions, they are obligated to follow through with the promise, or they just might find themselves in court.

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